The Two Types of Acquirers, and What They Mean to You

Andrew Silver is Managing Director at Allegiance Capital Corporation's New York office. He has more than 30 years of investment banking experience, and has completed over $20 billion in transactions, including acquisitions, divestitures and financings.

The private equity fund was interested in my deal. The partner said they’d looked at 48 companies in that market sector, and this was the first one they liked. They made a non-binding offer that was attractive to the seller, and began due diligence.

Ninety days later, they walked.

This is a business owner’s worst nightmare. (It wasn't any fun for me, either.) But having a skilled banker in your corner can help you overcome obstacles like this. It starts with having personal knowledge of the private equity funds involved; then generating interest among multiple parties on the buy-side, including both financial and strategic players; and, above all, perseverance.

Understanding the buyer

Not all private equity funds are created equal. Some have a multibillion-dollar investment fund; some have no fund at all. These funds raise money as deals arise (so-called “pledge funds” or “fundless sponsors”). Some funds are industry-specific, but most will work with any industry sector. Some try to put as much debt as possible on the balance sheet of an acquired company to boost investor returns. Others adopt a much more conservative financial strategy.

Most, however, are interested in one goal above all others-;to make as much money as possible, in the shortest time possible. They are in business to make money for their investors and they want to hit home runs. Observing private equity partners review prospective deals is much like watching a batter in the batter’s box watching pitch after pitch without an umpire. They can look at as many pitches (companies) as they want without having to swing at any. Their goal is to only swing when they can hit a home run.

Strategic or corporate buyers, on the other hand, know and understand your industry. They are not in business to buy and sell companies, although they will make acquisitions when it makes sense to do so. They tend to move more slowly and more diligently in evaluating opportunities. The risk of disclosure is greater with strategic buyers because they may be one of the seller’s competitors. Therefore, sellers need to carefully consider what confidential information to release and when. The seller should also be careful that key employees don’t learn about the potential sale of the company from third parties.

Your role, and your cash

The seller’s current management team is very important to private equity funds. The management team tends to be less important to strategic buyers, because they have their own executive team. Business owners will typically be required to sign a non-compete agreement with strategic buyers in the event they leave the company. Private equity groups are much more focused on retaining the management team through equity ownership.

When it comes to valuation, however, strategic buyers almost always win over private equity funds. Strategic buyers have lower financial hurdles and cheaper capital, as well as the opportunity to boost profits by realizing synergies through cost savings and/or accelerated sales growth.

One deal I did several years ago highlights just how significant the differences in valuation can be. My client, who manufactured building products, entertained offers from private equity funds and strategic buyers. The strategic buyers were intensely competitive. Each not only wanted to own the business, but also wanted to keep the other strategic buyers from acquiring it. In a true auction atmosphere, we were able to achieve a price almost 50 percent higher than what the private equity funds had suggested.

To meet and exceed seller expectations, a robust sales process should involve both strategic buyers and private equity groups. A banker who knows how to effectively work with both types of buyers is critical to achieve both the personal and financial goals for a business owner. If the owner’s primary goal is to maximize the value of the company and get the most cash possible, a strategic buyer will normally be the ideal candidate. If protecting management’s long term role in the company, after the sale, is a primary goal, a private equity group normally works best.

After the private equity group mentioned above walked, it was time to get in touch with other prospective buyers. One was another private equity firm who had not studied the sector as the first group claimed to have, but had a reputation for closing deals. From a size standpoint, the deal fit their portfolio nicely, whereas the transaction would have been extremely small for the first private equity group.

We explained to the business owners that not all private equity firms are alike, and that the second outfit seemed much more likely to get a deal done, precisely because it was a smaller fund. Indeed, within three months of our first meeting we had a new letter of intent. The deal is scheduled to close less than 12 months after our initial conversation with the second PE firm.